Question

Part 4

a)  What economic conditions would result in a very steep IS curve? Briefly explain.

b)  If an economy was in deep recession what type of demand-side policy would be most effective when the IS curve is very steep?

c)  Explain why low levels of economic confidence may hinder the effectiveness of monetary policy?

Your answer to Part 4 should not exceed 150 words.

Part 8

a) What is average labour productivity? Explain how average labour productivity can impact economic growth measured in terms of RGDP per capita.

b) Average labour productivity is presently higher in Australia than it is in China yet during the 21^st Century, China has experienced much higher rates of economic growth compared to Australia.

Explain possible reasons for this drawing on relevant evidence and examples to support your answer.

c) What is meant by diminishing returns to capital? Use a hypothetical example to support your answer.

d) While increasing outplut levels have been a benefit of economic growth, what have been some of the challenges associated with the phenomenon of economic growth? Here consider the broad social and environmental implications that stem from economic growth. In your answer draw on relevant evidence and examples.

Your answer to Part 8 including all sub-parts should not exceed 400 words.

Answer 1

PART 4

Answer a : when in an economy there is a condition prevailing where, the investment spending is relatively insensitive to changes in the rate of interest, then it will result in steep IS curve is steep because of the lower value of the multiplier.

Answer b: In Keynesian zone—very steep IS Curve occurs when levels of output is above potential. And in such senario where an economy was in deep recession the expansionary fiscal policy would be most effective.

Answer c: Low level of economic confidence leads to the switch from aggressive risk-taking to pervasive risk aversion. and this uncertainty would tend to dampen expenditures and may make monetary policy less responsive to stimulus.And higher risk aversion may also dampen the impact of stimulus on asset prices and lending.

PART 8

Answer a: Average Labour Productivity = Total Output / Total Productive Hours. It is the value that each employed person creates per unit of his or her input. gross domestic product is generally used as the measure of total output. For eg, suppose a country's total output for 2010 was $5 trillion. All members of its labor force worked a total of 100 billion productive hours for the year.

The inputs are the average level of human capital per person, the average level of physical capital per person, and the level of technology per person. Increases in the quantities of physical capital, human capital and technology per person lead to a higher standard of living over time.

In other words, By improving the productivity, the technological innovations and developments allow the countries to make production at lower costs. The increase in factor productivities would enable higher levels of output in the economy.

Answer B: The possible reason for such situation is the rate of productivity growth is the primary determinant of an economy’s rate of long-term economic growth and higher wages. An aggregate production function specifies how certain inputs in the economy, like human capital, physical capital, and technology, lead to the output measured as GDP per capita.

For example:

an economy that starts with a GDP of 100 and grows at 3% per year will reach a GDP of 209 after 25 years; that is, 100 (1.03)²⁵ = 209.

The slowest rate of GDP per capita growth in the table, just 1% per year, is similar to what the United States experienced during its weakest years of productivity growth. The second highest rate, 3% per year, is close to what the U.S. economy experienced during the strong economy of the late 1990s and into the 2000s. Higher rates of per capita growth, such as 5% or 8% per year, represent the experience of rapid growth in economies like Japan, Korea, and China.

Answer C: diminishing returns to capital is also known as dimnishing returns, which states that after some optimal level of capacity is reached, adding an additional factor of production will actually result in smaller increases in output.

For example, a factory employs workers to manufacture its products, and, at some point, the company operates at an optimal level. With all other production factors constant, adding additional workers beyond this optimal level will result in less efficient operations.

Answer D: Considering social environment implication, so the challenges that are associated with economic growth can be explained below:

The environmental impact of economic growth includes the increased consumption of non-renewable resources, higher levels of pollution, global warming and the potential loss of environmental habitats.

For example, the pace of global economic growth in the past century has led to a decline in the availability of natural resources such as forests (cut down for agriculture/demand for wood)

• A decline in sources of oil/coal/gas
• Loss of fishing stocks – due to overfishing
• Loss of species diversity – damage to natural resources has led to species extinction.

There is also a external cost of economic growth like Pollution, Damage to Nature, Global Warming, loss of bio diversity, Long term toxins, soil erosion etc.